Labor & Production - Essay Example

Introduction The amounts of work that human do can be measured in terms of labor. Labor is an important factor of production. It is one of the human inputs that enable production in the economy. Labor also determines the output in the economy. It is one of the crucial factors that enable production in an economy. In an economy employers hire employees and pay for their services in terms of wages. Wages are determined by the forces of demand and supply in the labor market. In an economy where there is abundant supply of labor, the wages decrease.

In other words, employers pay less for labor when there is high supply of labor in the market. Availability of labor in the market can influence the interest rates in the market as wells as the output produced in the economy. The labor market is dependent on the amount of labor demanded in the economy and the supply of labor available in the market. Labor demand in the market is influenced by a number of factors[Ste03]. One of the major factors that influence the demand for labor in the market is the price of labor.

When the labor prices are low in an economy, demand for labor increases. Firms’ demand for labor is determined by its prices. Low prices mean lower operational costs for firms and hence lower profits. Since, the primal motive for firms to go into business is to maximize their profits when cost of labor decreases, firms hires more labor to lower to increase their productivity. This means that the output level increases in the economy. More people in employment implies that there are higher output and hence Higher rates of consumption.

This means that there is high demand for goods and services implying that firms have to further increase their production. When there are high productivity rates, the demand for capital increases. An increase in capital demand forces the interest rates upward because there is high borrowing in the market meaning that demand for borrowed funds, from financial institutions declines[Ste03]. High borrowing means that financial institutions have to increase their interest rates in order to attract borrowers.

The other factor that increases the demand for labor in the market is Marginal labor productivity. Labor productivity is the levels of output that a unit of labor produces in the economy. Low productivity of labor in the market means that its demand for labor increases. This is because low levels of output imply lower level supply for goods and services in the market. If this supply outstrips the level of demand, firms are forced to increase their production to lower this supply[Ern08]. To lower supply firms attract more employees and hire more from the labor market.

These high demand forces the wage rates upwards since there is Shortage in supply of labor in the market. Supply for labor describes the amount of labor available in the market. When the supply for labor is high, wage rates decline. One of the factors that determine the level of labor supply in the market is the wage rates. Higher wage rates increase the supply for labor. This is because many people are incentivized to work for better earning. Labor supply is also determined by substitute occupations available in the market[Man11].

If the substitute occupations pay higher prices, laborers are will be willing to change to the higher paying occupations. This means that the labor supply decreases and Hence the price for labor rises. As prices increase this will also increase the supply of labor In conclusion government policy also determines the labor supply in the market if the government eliminates occupational licensing then this would in raise supply of labor in the market. Works Cited Ste03: , (Smith, 2003), Ern08: , (Ernest, 2008), Man11: , (Mankiw, 2011),